Market Behavior under expected and unexpected news

Question

I found the following text in the paper "Real-time Price Discovery in Foreign Exchange"

The general pattern is one of very quick exchange rate conditional mean adjustment, characterized by a jump immediately following the announcement, and little movement thereafter. Favorable U.S. “growth news” tends to produce dollar appreciation, and conversely. [...] [A] one standard deviation U.S. payroll employment surprise tends to appreciate (if positive) or depreciate (if negative) the dollar against the DM by 0.16 %.17 This is a sizeable move [...]

implying that this news are only available to the market once the announcement is made by the US authorities. Other similar announcements are considered: Retail Sales, Industrial Production, Consumer Credit, etc.

I am having trouble to understand why this is an acceptable explanation. From my point of view, the markets must "feel" the increase (decrease) and adjust accordingly before the announcement. Any price change after an announcement seem as irrational or herding behavior to me. On the other hand, I can think of examples in which a real surprise causes movements in the market: changes in Central Bank policy, social unrest, accidents, etc.

Am I missing something?

Answer 1

Short answer: the market has a forecast of the government numbers but the market considers the actual government numbers to contain information not available to the market. Therefore when unemployment is lower than the market forecasts this indicates that on average things will be better than than the market forecast before the release. This is not to say that the forecast has no use, nor that the government number is perfect. Instead, it merely requires that there be some information in the release not in the forecast such that differences from the forecast are informative.

Answer 2

They are betting on bigger growth. Rising Industrial production, retail sales etc. are indicators for growth. Investors want to buy as soon as possible after the release of the data because they anticipate that others will want to buy as well and this demand would make the price go up. So they want to get it at the best price. Shorter term traders (whether human or automated) betting on a spike up after the news release could also be driving the price up.

Answer 3

Your assertion is in line with 'rational expectations theory'. It says that economic agents will take all available information including the possible policy actions into account and then make decisions and these decisions will affect the future. In contrast to other theories this means that public policy will not be able to affect private decisions (policy ineffectiveness proposition). Rational expectations will counter the effect of public policy.

What is mentioned in the paper is quite different from this. Typically, it is assumed that market is information sensitive to public policy.